Yes. Applying for a loan will result in a hard inquiry on your credit report, which may slightly lower your score. However, making your payments on time can positively impact your credit history in the long run.
What Is a Personal Loan?
A personal loan is a lump sum of money you borrow and repay with fixed monthly payments over a set period. These are typically unsecured loans, meaning you don't need to provide collateral, like a car or house, to get approved.
Personal loans are more versatile than loans designed for specific purposes, such as student loans or mortgages. You can use a loan for a wide range of expenses, from debt consolidation to home improvements. However, some specific limitations may apply. For example, some lenders don't allow you to use the funds to pay for college education, repay other secured loans, or pay off credit card debt from the same lender.
You can get a personal loan from banks, credit unions, or online lenders. Loan amounts vary widely, from $1,000 up to $35,000. Lenders will assess your credit history, credit score, and debt-to-income ratio to determine your eligibility and interest rate.
Personal Loan Interest Rates
The Annual Percentage Rate (APR) on personal loans with fixed rates can range from 4.99% to 36%.
To determine your specific interest rate, lenders first evaluate your financial health and credit score. They may also consider other factors like homeownership status, education level, and employment history.
Borrowers with good to excellent credit scores (690 or higher) typically qualify for the lowest interest rates and can borrow much larger amounts. These borrowers also have more options to choose from when shopping for a loan.
If you have a lower credit score, say 580 or below, it can be more difficult to find a loan. You will likely face higher interest rates. However, your chances of approval will be higher if you have a stable income, a low debt-to-income ratio, a long credit history, and a solid track record of making on-time payments.
If you prefer the certainty of knowing exactly what your monthly payment will be, a fixed-rate loan is your best option. Your interest rate is locked in for the entire term of the agreement, so your monthly payments will remain the same regardless of what happens to market interest rates. This is a significant benefit, as it makes budgeting much easier and helps you avoid future surprises.
Personal Loan Requirements
To get a personal loan, you must generally meet these basic requirements:
- Be a U.S. citizen with a valid Social Security Number (SSN).
- Be at least 18 years old.
- Have a physical address in the U.S.
- Have an active email address and access to a computer or mobile device to complete the online application.
Other factors will also be considered during the credit application process. These include the information you provide on the application, such as your income and employment history, as well as data from the credit bureaus, including your credit score, recent credit activity, and any credit inquiries on your name.
Uses of Personal Loans
A personal loan provides great flexibility in how you use the funds. Once the money is deposited directly into your bank account, you can use it as you wish. For example, a $10,000 loan could cover a wedding, or a $5,000 loan could be used to remodel a bathroom. Many people use personal loans to consolidate debt, which helps them simplify their finances with a single, stable monthly payment.
A personal loan can also be a valuable resource for financing major expenses such as weddings, vacations, or home improvements. It provides quick access to funds and can help cover unexpected expenses like medical bills or car repairs.
Pros and Cons of Personal Loans
Pros
The funds from a personal loan are versatile and can be used for any purpose. This makes it a great way to handle significant expenses without overwhelming yourself. A personal loan can be used to consolidate high-interest debt, simplifying your financial obligations. With fixed payments, budgeting becomes easier and more predictable. The application process is typically quick, with funds deposited into your account upon approval. Since these loans are unsecured, no collateral is required. Interest rates are also usually lower than those on credit cards. Finally, making timely payments can improve your credit history, helping you build a stronger financial profile for the future.
Cons
To get approved, you'll need to meet the lender's credit and income requirements. You must be careful to avoid excessive borrowing, which can increase your overall debt. Banks and lenders often charge fees, such as origination fees. While rates are often lower than credit cards, they may be higher than other financing options, potentially leading to larger monthly payments. Keep in mind that missing even one payment can negatively impact your credit history.
How to Get a Personal Loan
Personal loans can be a great financial tool, but it's important to understand what lenders look for. Here's how to navigate the process:
- Check your credit history. This is the first step to understanding your options. It will give you a good idea of the interest rates and repayment terms you can expect. Knowing your credit history can show you if you qualify for a great rate right now or if there are areas you need to improve. Don't worry if your score isn't perfect; you can always take steps to improve it and qualify for a lower rate or a larger loan in the future.
- Gather your documents. Before you apply, have all the necessary documents ready to streamline the process. This typically includes proof of income (like a W-2 form, pay stub, or bank statement), a government-issued ID (like a driver's license), and your Social Security number.
- Assess your Debt-to-Income (DTI) ratio. Your DTI is a key factor lenders consider. This ratio represents the percentage of your monthly income that goes toward debt repayment. The lower your DTI, the better your financial position and the more likely you are to handle additional debt.
- Submit your application. This is the final step before receiving the money. Be aware that a hard credit check will be performed, which may temporarily lower your score. Depending on the lender, you could receive the funds in your account within a few business days!
Managing Your Loans
Before you even receive the money, it's crucial to have a solid plan for repayment. Your plan should ensure you can comfortably make the monthly payments throughout the loan term, which can range from two to seven years. Missing a single payment can damage your credit history, and defaulting on the loan can lead to late fees and contact from debt collectors.
What if you face financial difficulties during the repayment period? Don't panic. Contact your lender and ask about hardship repayment options. Many lenders offer programs that can allow you to defer payments for a short time.
Tips for Personal Loans
Securing a personal loan is a major financial decision, and it's essential to approach the process with caution. To make an informed choice, always compare offers from multiple lenders and carefully review the terms, including interest rates, fees, and repayment options. Before borrowing, consider how you will use the funds and create a detailed spending plan. Be realistic about your financial ability to make the monthly payments.
Personal Loan FAQs
The process is typically very fast. After approval, most lenders can deposit the funds into your account within one to five business days.
Missing a payment can have a negative impact on your credit history and may result in late fees. If you're having trouble making a payment, it's best to contact your lender right away to discuss your options.
It can be difficult to get a personal loan if you're unemployed because lenders typically require proof of a steady income. However, it's not impossible. If you have a stable income from another source, like unemployment benefits, a side hustle, or a pension, some lenders may still consider your application.
Most personal loans are unsecured, meaning you don't need to use an asset like your car or home as collateral. This is a key benefit, as it reduces the risk of losing your property if you're unable to repay the loan.